Elon Musk To SEC — That Is Not What We Agreed To

The SEC is trying to get the court to hold Elon Musk in contempt. The SEC maintains that Musk violated the plea bargain they made after the infamous “funding secured” tweet, a plea bargain that was accepted by the court as its final judgement and thus has the power of a court order for Elon Musk and Tesla.

That is a lot of legalese in the first paragraph of an article. For us simple-minded non-lawyers, the important starting point is: there is a court order that Musk and Tesla have to obey.

The SEC says Musk did not. Musk (and his lawyers) say he did. In other words, we have a simple case of “he said, she said.” But when lawyers are concerned, it is never simple. Look at the 33 pages the lawyers needed in order to say: “Musk complied.”

In the court order, there were a number of provisions about independent directors, chairmanship, fines, oversight, and communications. This complaint from the SEC is about the communications and oversight provisions. Simply stated, these provisions say that: Tesla needs to have a policy and procedures about communicating material information and Musk has to comply with these.

Tesla did create policies and procedures, which is not disputed. According to Tesla and Musk, Musk complied with them. Normally, this would be “case closed.” The SEC, in its unlimited wisdom, however, thinks Musk did not comply with the policy and procedures.

Let’s rewind: What happened? On February 19, 2019, at 7:15pm, Elon Musk tweeted something immaterial (immaterial = it does not really matter). The fact that it was immaterial is not disputed by the SEC‼ Please, don’t discuss it in the comments.

The tweet was corrected, or clarified, 4 hours later. For some reason, someone at the SEC thought this could point to Musk not complying with the court order. The SEC asked Tesla what happened, Tesla answered, yet the SEC had a lot more questions (on a Sunday) and did not wait for the answers (the next Monday), instead filing a complaint that Musk violated the court order and should be held in contempt.

What is important is that the court order and the Tesla policy are about material information. For information to be material, there must be “a substantial likelihood that the disclosure … would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.”

Again, the SEC is not disputing the fact that the tweet was immaterial. It is basing its complaint on not seeking and receiving prior clearance for the tweet. But for immaterial tweets and communications, prior clearance is not needed. (Getting dizzy yet?)

Ah, says the SEC, but to determine that it is indeed immaterial, you need prior clearance. This sounds logical, until you start thinking. This is about all written communication. In effect, Musk needs prior clearance for any written communication, even internally. Musk can’t write anything about Tesla without prior clearance. And if he wants to repeat himself after more than two days, he again needs clearance. That is the consequence of the SEC interpretation.

After a lot of legal arguments, Musk’s lawyers state: “Musk never consented to and would not consent to such a sweeping gag order, and Tesla has not implemented any such policy.”

This is essential. The court order is based on an agreement between two parties, the SEC and Tesla/Musk. You can’t alter in a one-sided way such an agreement, as the SEC is trying to do here. And even if this had been in the order, it would not have been valid, because it violates the US Constitution.

That leaves the question, what was the SEC thinking when it rushed to file the complaint. It did not even wait for the answers to its own questions. It is very hard to prove there is “clear and convincing evidence that an unambiguous court order was violated,” especially when the people who wrote the Tesla “Senior Executives Communications Policy” and were charged with enforcing it say that the tweets were not in violation of the policy.

In a normal court proceeding, this would be the end of it. But in proceedings where the SEC is a party, courts operate differently. The defending party is no longer presumed innocent until guilt is proven beyond a reasonable doubt. Rather, some believe the policy has become, in cases of the slightest doubt, the SEC is right.

If the result of this court case is that there is a significant difference of opinion, there is a huge problem. The basis of every argument is that “the clear and unambiguous terms of the Court’s Order” are indeed clear and unambiguous. In the Tesla rebuttal of the SEC arguments, the SEC is accused of altering the meaning of the settlement.

If the judge sides with the SEC and declares the SEC interpretation correct, the “Musk never consented to” argument throws the whole plea deal back to court. I can’t wait for the verdict.

About the Author

Maarten Vinkhuyzen Grumpy old man. The best thing I did with my life was raising two kids. Only finished primary education, but when you don’t go to school, you have lots of time to read. I switched from accounting to software development and ended my career as system integrator and architect. My 2007 boss got two electric Lotus Elise cars to show policymakers the future direction of energy and transportation. And I have been looking to replace my diesel cars with electric vehicles ever since.

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